529 College Savings Plans
What Is a 529 Savings Plan?
529 college savings plans are administered by individual states to help people set aside savings for qualified higher education expenses. Most state 529 plans have open enrollment, which allow both residents and non-residents to participate. Plans differ from state to state and many states may offer different contribution limits and investment strategies depending on the account holder’s investment goals. Qualified withdrawals are free from federal tax and there aren’t any income limitations or age restrictions. Fees and expenses vary by the type of plan and may include enrollment, administrative and asset management fees. Plans purchased from a broker typically are subject to additional fees. There are two types of 529 savings plans:
The Prepaid College Tuition Plan allows you to prepay college tuition at current rates. With this plan you can lock in the current cost of attendance by prepaying college tuition at today’s prices. Keep in mind that most plans only guarantee 100 percent coverage if the beneficiary goes to a public in-state college or university. You can transfer prepaid tuition contracts to a private or out of state school, but you may not receive the contract’s full value.
The College Savings Plan operates like a 401(k) plan, except it is funded by after-tax contributions. The plan will invest your contributions into mutual funds, stocks, bonds, and CDs (may vary by state). Fund strategies differ from plan to plan, so do your research. Some funds may follow an aggressive growth strategy (stock funds) when the beneficiary is young and later convert to a conservative growth strategy (bond funds) when the beneficiary nears college age. Unlike a Prepaid College Tuition Plan, a College Savings Plan is not guaranteed. The investment options are subject to market risk and may decline in value.
What Kinds of Plans are Available
First, see if your or your beneficiary’s state-sponsored plan offers a tax credit, deduction, or other benefits. Then look over the plan’s enrollment materials, often available on the plan’s website, to see if the terms, costs, and investment choices fit your savings goals. Don't forget, you can enroll in almost any plan offered throughout the country, not just the state where you live, so it may make sense to review other plans. Once you've decided on the plan in which you'd like to enroll, you can generally do it in one of two ways:
1. Online from the plan's website
2. By mail, with a paper enrollment form